Wednesday, November 7, 2012

No Matter How Poor You Are, If You Drink You Pay Taxes.

One of the biggest lies right wing extremists like to tell themselves is that poor people don't pay taxes. Instead they sponge off the noble and righteous people who do. Romney's famous 47% refers to American adults whose incomes are too low to owe federal income tax. The extremist part is taking that fact to mean 47% of Americans pay no taxes and use the federal government as a free ATM.

It's one of the right's oldest tropes, around for generations. Poor people are poor because they are lazy moochers and therefore deserve no help from the rest of us.

In addition to cutting off moochers, the right wants to reduce or eliminate taxes on businesses. If we take the tax burden off job creators, they'll use that money to create more jobs, thus more people will be employed, more people will pay taxes, fewer will need government benefits, and we'll all be able to pay a little less. How great would that be?

A lot in life depends on how you look at things. That's one way to look at things. Here's another.

Businesses don't pay taxes, they build them into the cost of doing business, as they should, and pass that expense along to their customers. That's what businesses do. That's how business works. If their customers are other businesses, they pass that tax along too until it is finally paid by us, you and me, everyone who buys goods and services. It's built into the cost of everything we buy.

I'm best qualified to tell you about one particularly excellent example of this, the federal excise tax on distilled spirits such as bourbon whiskey, aka the FET. This is not intended as a defense of taxes, the FET or any other, or of tax policy, either current or proposed. It is a defense of taxpayers.

All of them.

There is virtually no adult American who pays no taxes.

Included in the 47% of adult Americans who do not pay federal income tax are the poor, but also many low income working Americans, most retirees, most college students, and most veterans. Let's say you are one of those people and you like your Jim Beam Kentucky Straight Bourbon Whiskey. Here in the Chicago area, you will pay about $26 for a 1.75 L bottle of Jim, including the taxes that are added on at the register. Of that, about $4 is paid to the United States Treasury.

Congratulations, Jim Beam customer, you are a federal taxpayer.

That $4 isn't all of the taxes you pay, just the federal ones. State, local, and indirect taxes add another $10. In all, tax is about 54% of the retail cost of a typical bottle of distilled spirits. So of that $26, $14 is tax revenue, and $12 is split among the producer, distributor, and retailer. (As calculated by DISCUS, the distilled spirits industry trade association.)

Distillers and other businesses collect the taxes and remit them to the government, but they don't pay the taxes. You do, I do, whenever we purchase our favorite libation.

Because poor people spend all of their income, and spend most of it on taxed goods and services, they pay a higher percentage of their income in taxes than any other group. That's true whether or not they spend some of their money on alcohol, but if they do, they're paying even more tax. Alcoholic beverages are among the most heavily-taxed consumer products on the market.

The federal government first imposed the FET in 1791. It was the first federal tax on internal economic activity. All previous federal revenue came from taxes on international trade. Widely hated, it was the proximate cause of the Whiskey Rebellion, the first time the federal government used military force against American citizens.

In his 2006 book, The Whiskey Rebellion, William Hogeland argues convincingly that the FET was engineered by Alexander Hamilton, the Treasury Secretary, to favor large distillers over small ones, in order to make collecting the tax easier, and because Hamilton believed in general that a few big businesses were better for the economy than a lot of little ones. As the American polis began to form itself into two political parties, this became one of the major battle lines, and the FET became a useful symbol for Thomas Jefferson's Democratic Republicans against Hamilton's Federalists.

As president, Jefferson abolished the tax, so there was no FET between 1802 and 1814. We are currently celebrating the 200th anniversary of that tax-free period. Jefferson's successor, James Madison, reimposed it in 1814 but his successor, James Monroe, abolished it again. As a young man, Monroe had worked in a distillery and understood business better than his predecessors.

What followed was a long, 44-year period with no FET. In 1862 it was brought back to fund the Civil War, and we've had it ever since. In 1985, during the presidential administration of Ronald Reagan, it was increased to $13.50 per proof gallon, where it remains. A 'proof gallon' is one gallon of 100 proof spirits (50% alcohol by volume).

Although the FET hasn't gone up in 27 years, other taxes on alcohol have and as a 'vice,' alcohol is always a convenient target for politicians.

While producers collect and remit the FET, it only hurts their business inasmuch as higher prices affect sales. Would Jim Beam sell more 1.75 L bottles of bourbon if they cost us $12 instead of $26?

If alcohol taxes go up and so do prices, who suffers? I do, since it costs me more to get my drink on, but if I and all of my fellow moochers buy less alcohol, then it's mostly the people who make it and sell it to us who suffer, and most of them are members of the moocher class too. The bottling line at Jim Beam starts to cut hours and lay people off, so do my favorite bars and liquor stores.

When Reagan raised the FET in 1985, tax revenues declined because sales did. It took several years for tax revenues to return to pre-1985 levels.

So, in a democracy, we decide what we want to pay for as a community, then we figure out how to tax ourselves to pay for it. That's how it's supposed to work. It's hard to believe the hodge-podge of taxes and taxing authorities we have now is in any sense designed to be reasonable or fair. If it can even be said to have an overall purpose, it would be simply to maximize revenue.

How do we come up with a more rational way to run our country's finances? Not villainizing half of the tax-paying population might be a good place to start.


Stacy Thomas said...

Chuck, what gives? "Big lies right-wing extremists tell"? This is hardly the no-BS analysis I expect from you. You need to ask yourself why a simple excise tax discussion needs to be framed this way. What "lies left-wing extremists tell" will you be addressing next post?

Chuck Cowdery said...

I sure hope you read past the first line.

sam k said...

A compelling and very well-written piece Chuck. Thanks for your insight on this "day after."

Stacy Thomas said...

As noted in my comment, I did read past the first line. The basic facts about excise taxes are pretty interesting and well worth a post. In my opinion the agitprop window dressing detracts from the knowledgeable discussion one comes to expect here. I mention this because it's such a dramatic departure from the norm.

Chuck Cowdery said...

I can reassure you that it's more of an isolated incident than a dramatic departure, but if you feel the thesis was just 'agitprop window dressing,' then you didn't get the piece.

Tom Foolery said...

I agree that the FET should either be done away with or reformed.

However, you fail to mention one very salient fact. The FET and other "sin taxes" are voluntary and related to consumption, not income. One can choose not to pay a consumption tax. It's a choice. One does not have much of a choice with regards to income taxes. If I don't purchase liquor, the government is indifferent; if I fail to render to Caesar the things which are Caesar's, my choice results in a confrontation with armed Feds.

I'm actually part of the 47%. The argument is not that the 47% don't pay taxes (I'm sure most who are employed have taxes withheld from their paycheck), it's that this portion of the population receives much more in government entitlements than they put in. I would not begrudge my 47% our liquor. But surely the amount of liquor taxes paid is very small compared to the amount of entitlements received. Liquor is still relatively cheap in this country, by the way.

You've lost my subscription to your newsletter, and a few others of which I'm personally aware, because of your outspoken religious and political views. Faced with the prospects of increased government restrictions on my personal liberties, that's one choice I'm glad I can still make.

Justin said...

I have long been an advocate of imposing a "junk food" tax. If tax on liquor is so high because its a "luxury" item, then how is junk food really any different? Let's put a modest tax on chips, candy, and sugared soda and watch the govenment coffers overflow.

JSJ said...

Chuck, I really enjoyed this, very interesting stuff. Only slightly on topic: Alexander Hamilton led one crazy life. I can't recommend enough Ron Chernow's biography of him.

Unknown said...

Excellent article. If disagreeing with Chucks other opinions stops a person from enjoying his well written newsletter then its their loss.

Rob K said...

So... you're against corporate taxes then, since they're always passed on to the consumer, and thus hurt poor people the most? Just think, if we eliminated all corporate and excise taxes, the cost of living would drop, and everyone would be much better off.

As a right-wing extremist, I dream of a world where a family can live a middle class life on a single income earned working no more than 18 hours a week. I dream of a world where you can start a new business without ever interacting with any agent of the government, and thus are not made a wage slave to big corporations.

Chuck Cowdery said...

I'm against hidden taxes, which is what taxes on businesses tend to be, but I also recognize that politicians hide taxes because most of the public wants to pretend taxes are being paid by someone else. We can't handle the truth. The elimination of a particular type of tax (i.e., corporate, excise) will change nothing and such proposals are just another kind of slight-of-hand. No one even knows what the true tax burden is and that's what affects the economy.

Anonymous said...

Heh, I saw you aggressively flame somebody on a forum over a point of usage, after he apologized, and then you flamed him again after his second apology, and to top it off you accsed him of being the aggressor.

I said "what a arrogant, strutting, unsympathetic, officious little pinprick. Five bucks says he's a Democrat." Not the halfway sane kind, but the kind who screams 'right-wing extremist' at people slightly left of Bill Clinton circa 1996 (remember him, the only successful president you've had since JFK? The one you all squeal about when you claim to be fiscally responsible?).

Yup. Called it.

I don't give a shit if you approve the comment, pinprick. I won't be back, and I'm only talking to you.

Chuck Cowdery said...

Delicious! Thanks so much for playing.